Public Bill Committee

[Mr Edward Leigh in the Chair]

Written evidence to be reported to the House

EN 29 CCSA
EN 30 Centre for Energy Policy and Technology, Imperial College London
EN 31 Sedgemoor District Council
EN 32 Statkraft
EN 33 Nuclear Industry Association

Clause 18  - Capacity agreements

Alan Whitehead: I beg to move amendment 73, in clause 18, page 10, line 17, at end insert
‘or to verifiably reduce demand permanently’.

Edward Leigh: With this it will be convenient to discuss the following:
Amendment 74, in clause 18, page 11, line 6, at end insert—
‘(6) Provisions in subsection (4) and (5) may also apply to a holder of an agreement to verifiably reduce demand permanently.’.
New clause 3—Electricity efficiency incentives—
‘(1) The Secretary of State must within one year of the passing of this Act make regulations establishing a scheme or schemes to make payments for the purpose of rewarding the installation of electricity saving measures.
(2) Prior to the making of regulations under this section, the Secretary of State must publish a report setting out the total potential for electricity demand reduction and the extent to which this potential will be achieved by Government policies including—
(a) the scheme or schemes; and
(b) other relevant programmes, regulation or expenditure.
(3) Regulations under this section must—
(a) specify the parties from and to whom payments may be made;
(b) make provision about the calculation of such payments;
(c) make provision about—
(i) the level;
(ii) the type;
(iii) the frequency; or
(iv) the duration;
of such payments, which may differ according to the measures installed or the parties from or to whom payments are made;
(d) make provision about the monitoring, verification and calculation of electricity savings.
(4) For the purposes of this section, electricity saving measures are defined as measures which achieve permanent and verifiable saving of electricity, which is their primary purpose.’.

Alan Whitehead: The amendments and the new clause relate to an area about which I think every member of the Committee is concerned. Indeed, those members of this Committee who are also members of the Select Committee on Energy and Climate Change have expressed considerable concern about it in the report published on the scrutiny of the draft Energy Bill. I am referring to the question of demand-side reduction or energy efficiency. The concern stems, on all sides, from the recognition that as far as electricity production is concerned, the most efficient power station is the one that does not exist because the demand has been taken out of the system and therefore that power station is not used. The benefits of that demand-side reduction are very clear. The Department of Energy and Climate Change itself estimated that a 10% permanent reduction in electricity demand in our system could, by 2030, save electricity equivalent to that generated by five power stations.
The Bill, when it arose in draft form, unfortunately had nothing in it that drew attention to that potential for demand-side reduction; nor did it have in it any way of providing the Government with the power to institute measures that could make those permanent and verifiable reductions in demand in the system. Shortly after the draft Energy Bill was published and, indeed, on Second Reading of this Bill, the Secretary of State indicated that, on reflection, the Government felt that there should have been something in the Bill relating to demand-side reduction and that he was undertaking a consultation about whether there should be something in the Bill and, if so, what form it should take.
The consultation document has been produced and has suggested that there could be a number of different forms of facility for demand-side reduction in the Bill: a market-wide arrangement, possibly for providing an incentive for those people who verifiably reduce demand over a period, both in domestic properties and, particularly, in industry and commerce; methods of reducing capacity, perhaps through the capacity mechanism, in terms of providing incentives and rewards for particular ways of improving energy efficiency by changing the nature of how electricity is used; and decapacity mechanisms whereby new forms of motors and plants could be introduced on a much greater and verifiably more efficient basis of energy use. A range of things could between them produce that demand-side reduction on a permanent basis. Indeed the McKinsey report indicated that there was not just a considerable potential for cuts in electricity demand—it suggested that a 36% cut in commercial and industrial use could be possible by 2030—but that, as things stood at the moment, only about 37% of that demand reduction potential could be realised, and therefore the gain from new measures would be potentially immense.
As far as the Bill is concerned, there are no measures coming forward at the moment. There is the possibility, however, that following the consultation, the Government will place amendments in front of the Committee before the end of its deliberations. As far as I know, there is no guarantee that that will happen, and indeed the consultation indicated that it would be carried out on the basis that there would be a consideration of whether such measures should be introduced in the Bill and not that there would be. I was pleased to hear the Secretary of State suggest that measures should be introduced in the Bill, but where we stand on implementation is very uncertain.
It is important to have in the Bill at least an outline power for the Government to act. The amendments specify that there should be permanent and verifiable reductions in demand, placing a framework for new clause 3, which sets out not the exact nature of demand-side reduction measures, but that the Secretary of State should produce a definitive report within a year of the passing of the Act and that that report should set out how to establish such a scheme and make payments for the purpose of rewarding the installation of electricity-saving measures. That report and the regulations under the clause are not prescriptive. They give the Secretary of State a considerable amount of leeway to establish a scheme, or schemes, and possibly to reflect on one or more different methods of supplier obligation, of reward for particular measures or reward for overall verifiable reduction.
As I have emphasised, the clause specifies not a particular way of doing things, but that the Secretary of State should introduce a scheme or schemes at an early date. I hope that the amendments will be welcomed by the Government, because they set out in the Bill what is required and what the Secretary of State should have as a power. Clearly, much of the heavy lifting will be done at a later date, by which I mean looking exactly at where those measures might fall. Within the existing structure of the Bill, there will be the practical issues, as far as payments are concerned, of whether the measures should be in the contracts for difference system, falling under the levy control mechanism, or under capacity payments, falling outside the levy control mechanism. Such mechanisms represent different ways of doing things as far as demand-side reduction is concerned. I emphasise that that relates to a permanent and verifiable reduction, as is stated in the amendments, not to the category of measuring demand-side response. That response can also be assisted by capacity payments, but it relates to such things as interconnection and storage, which, although they make much more of the electricity that is produced, nevertheless do not themselves permanently and verifiably reduce demand.
The amendments would perform a modest service for the Government, by doing some of the work that I anticipate and hope they will introduce, and giving the Committee certainty that those things will happen. The Government would then have the relatively pleasurable task of deciding exactly where we go from here and exactly how to ensure that the considerable gains, or the relatively low-hanging fruit, of energy efficiency and demand-side reduction—as opposed as to concerns about ever-increasing capacity—are realised as an essential part of the Bill.

Peter Aldous: I will not detain the Committee long. I added my name to new clause 3, which was tabled by the hon. Member for Southampton, Test, and I welcome the fact that he has raised this important issue. I did so on a probing and exploratory basis, so as to obtain the Minister’s assurance that the Government recognise the importance of demand-side measures. Supply and demand are two sides of the same coin: they need to be considered together and their policies co-ordinated, but demand is often overlooked. With apologies to the hon. Member for Liverpool, Wavertree and my hon. Friend the Member for South Thanet, boys do like building things—very often, the bigger the better.
I believe that this Government recognise that reform of the electricity market must include the vital role of demand-side measures in achieving the three overarching objectives of security of supply, decarbonisation and keeping down bills. Reducing demand is far cheaper than building new generating capacity. As reflected in the Government’s consultation on demand-reduction options, there is a need for a broad framework within which demand-side measures can be introduced, and a need for a strategic outlook to energy efficiency, as in Germany. At this stage, there is no need to go into the detail of such measures; that is for secondary legislation.
It is important not to pre-judge the consultation, which finishes on Thursday, although it is important that measures and incentives to reduce demand can be introduced quickly, as they will shortly bring downward pressure to bear on consumers’ bills. It is also important to have in mind the job-creating potential of such demand- reduction measures, particularly at the level of communities and of small and medium-sized enterprises, including the significant role in tackling youth unemployment and providing a stepping stone to the workplace.
I express those views on a probing and exploratory basis, and I would very much welcome an assurance that the Minister fully recognises the importance of having a joined-up approach, so as to bring forward both supply and demand-side measures as part of EMR.

Luciana Berger: May I start by telling the hon. Gentleman that girls like building things, too? As a proud member of UCATT—the Union of Construction, Allied Trades and Technicians—I have a keen interest in such matters. I hope that my two female colleagues on the Committee share my view.
My hon. Friend the Member for Southampton, Test has given us an overview, so I will not detain the Committee by repeating what was said by him or by the hon. Member for Waveney. Instead, I congratulate my hon. Friend on his proposals and his long-standing work on demand reduction and energy efficiency not only for this Bill, but for the ten-minute rule Bill that he introduced in the House last week and for many years previously. At a time when rising energy bills are a prime concern for everyone across the country, there is a vital need to introduce measures to encourage people to use less energy.
My hon. Friend’s amendments have exposed a gaping hole in the Government’s current proposals—the present very unfortunate lack of demand-side measures. With these amendments my hon. Friend has put forward a sensible way for the Government to address this omission, which would allow for decapacity payments as part of the capacity market they are considering. I am sure that when the Minister makes his remarks he will tell us that we should not be alarmed, as the Government are currently in the process of consulting on demand reduction measures. We know that the consultation closes on Thursday, and we anticipate that the proposals will be brought forward as soon as practical after that process is complete, and indeed the Government are consulting. However, this is not the position we were told we could expect to be in at this stage of the Bill. The introduction to the draft Bill said that:
“we are currently reviewing the potential for incentivising further demand reduction in the electricity sector. This work will report over the summer, in time to fit with legislative timetables, should it be required.”
This rather prompts the question whether the Minister still thinks that demand-side measures are required, and if not, why not? If so, why have they not been included thus far in the Bill? This was an issue that was identified during pre-legislative scrutiny. When the Secretary of State was questioned by the Committee, he himself said that:
“there is a lot of work we should be doing and are doing on that.”.
In response, the Committee’s final report was particularly critical of the Government’s failure to bring forward demand-side measures. It said:
“It is completely unsatisfactory that DECC's work was not completed in time to be published alongside the draft Bill. This suggests that DECC is still failing to give enough priority to ensuring that demand-side measures contribute to our energy policy goals.”
The report also noted that this omission was particularly worrying given that other countries, such as Germany, aim to reduce electricity demand by 25% by 2050. I do hope that the Government will give this serious consideration, regardless of whether they decide to accept these amendments today. It is surely right that when we ask bill-payers to underwrite billions of pounds of investment in new energy generation, we also do what we can to ensure that less energy is used in the first place, and to better manage usage and smooth out demand.
I now move on to energy efficiency, on which my hon. Friend has laid out a number of options for the Government to consider. Certainly the Minister, the right hon. Member for Bexhill and Battle, has talked a good game on this in the past. Indeed, I know from our many exchanges across the Dispatch Box and in Committee during the previous Energy Bill that he shares the Opposition’s view on the crucial importance of energy efficiency. I say genuinely that while we have not always agreed on every detail of every policy, I have never doubted his personal commitment in this area. However, I must say to him and his colleague that despite his obvious passion, his Government currently do not have a record to match this.
Only last week in the House we discussed the issue of the budget for the Warm Front scheme, which came to an end last Saturday, and which was cut by two thirds and under-spent by £50 million in each of the past two years. Concerning the green deal which was launched yesterday, back in 2010 Ministers stated that this would create up to 100,000 jobs in the insulation industry by 2015, and would reach 14 million homes by 2020. Their own impact assessment shows that under the green deal the number of loft insulations will fall from 900,000 in 2012 to 150,000 this year, a decrease of 83%. The number of cavity walls being insulated will also go down, from 700,000 last year to 400,000 this year, a fall of 43%.
We have raised the challenges we see with the green deal many times, and we still think the Government need to rectify these issues. We have discussed the interest rate many times, and we think it is too high. There are also issues around hidden penalty payments, which could see consumers charged thousands of pounds for paying off their loans early. In previous sessions we discussed the issues around rising levels of fuel poverty, which again we do not think are currently being adequately addressed. The energy company obligation which the Government are bringing in alongside the green deal will lift just 250,000 homes out of fuel poverty by 2023, according to the Government’s own impact assessment. This is despite the Government’s own fuel poverty advisory group showing that 300,000 people were pushed into fuel poverty this winter alone.
The Minister and I have been over these issues in great detail on many occasions, and I am not seeking to revisit these debates with him this afternoon. The point I am seeking to make instead is that as well as looking at how these deficiencies can be rectified, the Government still need to go further and examine what further options are available. For example, there is huge potential in the area of electrical products. I spoke to one representative from the electrical products industry just this past week, who said that they despaired of the Government’s focus on simply the fabric of buildings, which was to the detriment of looking at other options such as electrical products.
We know from national consumption figures that in 2011 the domestic sector consumed 112 TW of electricity. Of this, 91 TW was domestic electrical products. DECC estimates that demand from domestic electrical products will increase by 12% by 2030. While DECC also estimates that there is potential for reducing domestic product consumption by 42% by 2020, the Government are yet to come forward with any details beyond existing policy of how they plan to achieve that. It is clear that there is much more, across a range of areas, that the Government could be doing—and indeed are going to need to do—to achieve our carbon emission targets.
To conclude, I hope that the Government gives this area real thought, and does so with all urgency. I hope that they take action to plug one of the gaping holes in the Bill by bringing forward demand-side measures. I hope that in his response, the Minister gives careful consideration to some of the arguments put forward by my honourable Friends. I also hope that the Minister can give us a bit more detail on what options the Government are considering as part of their consultation so that we can at least get some sense of the Department’s direction of travel on this very important issue.

Robert Smith: I congratulate the Member for Southampton, Test on his introduction to the new clause, and the peg it provides to highlight yet again that reducing demand for electricity is the best fit option to tackle our climate change, our energy challenge and our fuel poverty. However, people have always said that it is the best fit option, and we need to consider carefully how we actually achieve it—it has often been described as the low hanging fruit. When Martin O'Neill—now Lord O'Neill—chaired the Trade and Industry Committee and we were looking at energy matters, he would often introduce an item by saying that “The low hanging fruit is to reduce energy use”. It is clearly something that all sides are committed to and campaign for, taking part in warm homes week and in initiatives to promote it. However, it is still proving a great challenge. That is why I particularly welcome the recognition that, even if there were to be demand-side measures and a financial incentive, other measures would still need to be in place, particularly regulation on products and buildings. It is the combined effect that makes the difference to overall consumption.
In warm homes week, I helped to install cavity wall insulation in a semi-detached house. The installer was busy drilling holes down the wall between the two neighbours. That was to put a chain down to make sure that the neighbour did not get the cavity wall insulation because they did not want it; people still remember the “World in Action” documentary that said cavity wall insulation could be bad for their house. There is a long educational way to go, and a lot of incentive to go as well.
Electrical appliances were mentioned. Although getting a more efficient appliance into the house is a good thing, the use of the appliance is also important, and a financial incentive could well encourage people to see the benefits of such appliances. If someone buys a really efficient fridge-freezer for their kitchen, the question is what happens to the old freezer? Quite often, it is put into an outbuilding and used to store other goods, therefore increasing the house’s energy consumption.
It is important to have a raft of measures to reduce demand. I look forward to hearing the Minister’s remarks on how the Government plan to take the consultation forward. It is great that the consultation is happening, and we should recognise that, but on all sides of the House we must acknowledge that we have still to grasp fully the full potential of demand reduction.

Michael Weir: I would like briefly to add my voice in support of new clause 3, which is a very good measure; I hope the Government will take on board the points that have been made and look at the new clause.
The hon. Members for Southampton, Test and for West Aberdeenshire and Kincardine both talked about low hanging fruit, but experience shows that that is not so easy to gather. We talk about the green deal and the energy company obligation, but, for example, previous attempts to get energy companies even to give away insulation have proved very difficult: people have been resistant to taking it for various reasons. I am not so sure that the fruit is that low hanging or easy to gather.
The Government’s consultation document on demand reduction makes the very good point that, as one would expect, when prices go up, energy use declines. However, it also makes the point that, for every 10% increase in price, electricity demand falls by only 1%. So we have a very long way to go in this area, even by way of price. That situation has led to the slight contradiction at the heart of the Bill: we talk about building new power plant and the jobs that that will create, but unless we also hit at demand reduction the Bill will not have the effect that is hoped for on carbon reduction.
The hon. Member for Liverpool, Wavertree raised the issue of energy efficient appliances. Speaking as someone who has unfortunately had to replace some of their appliances recently, I can say that that issue is not as simple as it sounds. When one goes to a shop to look at energy efficient appliances of any sort, one finds that they often cost very much more than appliances that are less energy efficient. Some of us, of course, would say, “Okay, we will pay the extra and buy the energy efficient appliance,” but not all of our constituents have that choice. We are in the middle of very difficult economic times, and many people are having to make difficult choices about how to spend their money. It does not matter how often it is pointed out to people that, with efficient appliances, they will use less electricity; when they are looking at the upfront cost of a new fridge, freezer or cooker they will often go for the lower-priced brands simply to get that lower price.

Luciana Berger: Does the hon. Gentleman share my concern about the estimated 5.2 million cold appliances—including fridge-freezers—that people are using, are 15-plus years old and use four to five times more energy than a new product? It is particularly people on low incomes who have those older products and are therefore using four times more energy. They could save money but they do not know about the opportunities that are available to them.

Michael Weir: The hon. Lady is correct. The problem that I am highlighting is that, if we go into a typical electrical shop in any of our constituencies, we will find that there is a vast gulf between the higher end of the market, which is very energy efficient but very expensive, and the lower end. Many of my constituents simply cannot afford to buy higher-end appliances. If we are looking at energy reduction, we must look at issues such as that. We cannot look just at insulating homes; we must look at whether there is a way to encourage people to start using energy efficient appliances or to help them to buy those appliances. I hope that the Government will look at that part of the consultation.
I was recently at a breakfast where we were discussing energy efficiency, and one person made the point that new televisions, for example—those massive flatscreen things that we often see in homes—use a tremendous amount of energy, even when they are on standby.

Laura Sandys: We both attended that meeting, at which it was discussed that when cheap televisions, in particular plasma televisions, are on standby, they cost a lot of money but offer no benefit to the consumer. There is an interesting question about behaviour change but also about labelling. Should we not be looking at a measure similar to miles per gallon, which provides information about the usage and cost of a product?

Michael Weir: The hon. Lady makes a good point, and I hope that the Government will look at that. Televisions are a good example. She is right that we were told about the energy that they consume in standby mode. If we look at the other appliances that we have in our homes, how many of us have a Freeview box or a Sky box, for example? The television listings, or whatever they are called, are updated overnight while the box is on standby. If the television is switched off overnight and switched back on in the morning, the television listings will not be available. Those are simple issues but they need to be looked at, because such processes use up energy.
I was struck by the evidence given by Peter Smith from National Energy Action, who talked about an energy efficiency power plant at Guangdong in China. The Minister of State, Department of Energy and Climate Change, the right hon. Member for Bexhill and Battle, was also taken with the idea, and he made the point that it was a virtual power plant. Peter Smith replied:
“Yes, it is a virtual power plant, but the interesting thing from the perspective of the UK is that the Chinese have used the fact of the energy saving potential of the non-domestic sector to pay for extensive measures in the domestic sector, particularly the replacement of electric heating in big tower blocks”.––[Official Report, Energy Public Bill Committee, 17 January 2013; c. 153, Q428.]
In some situations, instead of building a new gas plant or wind farm, we might look at energy reduction through bringing together all those things. It is an innovative way of looking at the matter. I am a charitable soul, and I believe that the Government are looking at such questions through the consultation, but we must think outside the box to find ways of reducing energy. There are a lot of options out there, and we should look seriously at them.

Barry Gardiner: Is not it wonderful? What a way to start the week. Sweetness and light have broken out in the Committee—

Edward Leigh: It is under my chairmanship.

Barry Gardiner: Indeed. We have started the week with an all-party consensus in the Committee, which is greatly to be welcomed. We have all seen the McKinsey cost curve, and we know that CCS is at the most expensive end of that curve, at about $60 per tonne of carbon saved. Towards the middle of the curve, a positive cost, which is estimated to be between $2 and $15 a tonne, is associated with REDD-plus. Some would say that it is far more expensive, but it is nowhere near as much as CCS. At the negative end of the cost curve, we find the savings. Society has most to gain from measures at that end of the cost curve, but none of them is in the Bill. Once again—as he has done before and as I am sure he will do many times over the next few weeks—my hon. Friend the Member for Southampton, Test has done the Committee a service, and it was great to have the support of the hon. Members for Waveney and for Richmond Park (Zac Goldsmith) for new clause 3.
The hon. Member for Waveney, in addition to leaving out one of the women on the Committee—I know that he apologised for doing so—said that the Minister had a boy’s problem with building things. It is the first time that I have ever known anyone stand up in Committee this early in the morning and suggest that the Minister has an erection dysfunction, but he seemed to get away with it.

Edward Leigh: Order. I think we should move on now.

Barry Gardiner: What the Whips will say about it, I do not know. I want to pick up the theme started by the hon. Member for Angus. The key words in new clause 3 are “permanent” and “verifiable”, because we have to be sure that any emissions reductions will be permanent and verifiable. The point made about energy efficiency standards and product standards is absolutely key to that. We have seen the proposals that the Government have come out with on the green deal, but as yet we have not seen them come forward with proposals that are really compulsion, not simply incentivisation. It would be useful for them to do that in response to the amendment.

Laura Sandys: I just want to clarify that, when we talk about product standards, that is a competence held by the EU and not by the UK.

Barry Gardiner: The hon. Lady is correct that it is a competence held by the EU and not the UK, but our Government have capacities to influence the Commission’s work in that direction. That is something that we should be working on. Indeed, building standards for thermal efficiency is an area where we can insist on certain thermal insulation standards. So product standards are one part of it and building standards are another. As she rightly says, product standards are not within our gift—straight and simple—but other areas are.

Luciana Berger: I listened carefully to the intervention from the hon. Member for South Thanet. Does my hon. Friend not agree that, although product standards are determined by the European Union, there are opportunities for the Government to go further and come up with voluntary agreements for the sector?

Barry Gardiner: My hon. Friend is entirely right, but I want to go further than simply encouraging industry to have voluntary standards because if we are to achieve the progress that we need in the time scale that we have for emissions reductions, it is vital that we take action at a European level to get agreed product standards. Earlier we discussed plasma screen televisions being left on standby. Such products are no longer acceptable; as long as we go on having products that simply sit there wasting electricity, all the resource that we put in at the other end to try to cope with the emissions that that electricity produced is being doubly lost. Why build a CCS power plant at enormous cost—billions of pounds—to cope with the standby mode of appliances that are not being used?
I am sure that the Minister knows the figures only too well: in America, there are 20 power stations operating full time simply to provide the electricity to keep America on standby mode. That is an absolute nonsense. Therefore, it really is important that the Government not only take on board the sense of the amendment, to which the Minister is invited to respond with the measures that he will take to reduce energy waste, but go further and think of the ways in which compulsion will become increasingly necessary.

Robert Buckland: I am listening carefully to the hon. Gentleman’s argument. He mentioned compulsion, and the point has already been made about the EU competency. Is there not a danger that however well intentioned Members’ aims may be today, we could, in effect, gold-plate the situation? That would not help the manufacturers of energy efficiency products such as a firm in Swindon that I visited recently that demonstrated, by its own energy efficiency measures, that thousands of pounds can be saved a year. Is there not the danger that, by going too far, we could damage the aims that we all share?

Barry Gardiner: The hon. Gentleman is absolutely right to talk about business competitiveness and gold-plating, but there is no issue about gold-plating here because there is no directive that we seek to go further on; I am not suggesting that. I suggest that the Government need to press for higher standards at a European level that can be brought in across the EU to reduce the amount of waste we are producing. Unless we have a real understanding that that is important and a commitment to going in that direction, we will not achieve the qualitative shift in output that all of us wish to see.
I do not wish to detain the Committee further. This is a probing amendment, and I am interested to see how the Minister responds. I know very well that he is serious and that he wants the whole of the green deal project and all that the Government are doing to succeed, but it was an omission to leave out such a matter. I hope that he will now take this forward with real gusto and try to make a difference that we all see.

Gregory Barker: We have had an excellent debate. I pay tribute to the hon. Member for Southampton, Test and my hon. Friend the Member for Waveney for tabling this probing amendment.
It is important that we get to discuss demand reduction, which is an essential part of the energy mix. There can be no proper discussion and scrutiny of electricity strategy or really forward-looking ambitious Government energy policy without the inclusion of our plans for demand reduction.
The hon. Gentleman speaks with genuine expertise and long-standing experience on this issue. I have heard him speak in the Chamber on a number of occasions. I only wish that, in the 13 years under the previous Government, his Front-Bench colleagues had listened to him a little more. He was one of the voices in the wilderness then on this agenda. I assure him that there is now a growing consensus that we cannot ignore the issue and that it does have a place, right up there, in the forefront of the policy mix.

Albert Owen: The Minister is making a big error in thinking that energy efficiency came in with this Government. In Wales, we have been putting in loft installations for more than a decade, and Government policy has been pushing it. My hon. Friend has been in tune with that movement in Wales.

Gregory Barker: The hon. Gentleman makes a well intentioned error. We are talking about not thermal efficiency and building measures such as loft lagging, but demand reduction measures in the electricity markets. The overwhelming majority of homes in Britain are not heated by electricity; I think about 2 million homes are.

Albert Owen: No gas in some areas.

Gregory Barker: The majority of UK homes are heated by gas or heating oil. Those measures, important as they are—we have already had a whole Bill devoted to them—are outside the electricity markets. We are debating how we properly recognise the role of demand reduction in the context of electricity market reform. On another occasion, I will happily debate the ambitions of the coalition Government to transform the thermal efficiency of our homes, but this is not the place to do that.
The question is how we can permanently seek those more efficient reductions in electricity demand. The amendment relates to the inclusion of electricity demand reduction as part of the capacity market. The new clause relates to the introduction of powers for the Secretary of State to establish a scheme to make payments to reward those who install measures to use less electricity.
I will discuss the detail of those later, but first let me reassure the hon. Members for Southampton, Test, for Angus, for Brent North and for Liverpool, Wavertree, and my hon. Friends the Members for Waveney and for West Aberdeenshire and Kincardine that the coalition is absolutely committed to being the first Government ever, in the context of the electricity markets, to bring forward radical demand reduction Government policies. I said that here in Westminster the night before the Bill was published and took a cross-party selection of colleagues through the Government strategy, which includes a comprehensive consultation, to arrive at a really robust response that will include legislation.
Given the expertise on both sides of the Committee, I do not need to labour the importance of increasing energy efficiency and changing how we use electricity, both as a country and an economy. Energy efficiency belongs at the heart of the low carbon economy that we are building. The coalition has a mission to seize the energy efficiency opportunity and to accelerate the deployment of 21st-century energy saving measures, some of which have been alluded to in the debate, and that is why we created the Energy Efficiency Deployment Office.
When we came into Government and inherited the Department of Energy and Climate Change from the now Leader of the Opposition, there was an office for renewable deployment, an office for nuclear deployment and one responsible for oil and gas. Those big energy interests were well represented in the hierarchy of the Department. There was, however, no office for energy efficiency. That was a failing not only of the previous Labour Government; there never had been such an office under any previous Government. That was one of the first things that I wanted to put right. I wanted to ensure that a strong, equal voice for energy efficiency existed within the context of policy making and the Department.
I am delighted that we created the Energy Efficiency Deployment Office, because energy efficiency can play a significant role in achieving a sustainable energy system for the UK. Not only that, it is a sure-fire way for homes and businesses to save money on energy bills while creating jobs in local economies. However, the Government do not just talk about energy efficiency; we are actually walking the walk and delivering real savings in the public sector.
Back in 2010, the coalition signed up to the commitment that the previous Labour Government had refused—namely, the 10:10 campaign. Conservative and Liberal Democrat colleagues alike committed the Government to cutting energy use and carbon emissions by 10% in their first 12 months of office. The previous Government did not make that commitment because the Ministers of the day told me that it could not be done—there was not the money, the buildings were too old, the systems were not there and it was not a real opportunity. However, not only did we meet that 10% in our first year in government, but we actually exceeded the Prime Minister’s target and cut carbon emissions across Government buildings by 13.8%.
Last year, we published our energy efficiency strategy, which sets the direction for energy efficiency policy for the coming decades. We identified four overarching barriers preventing the take-up of energy efficiency throughout the UK: embryonic markets; misaligned financial incentives; a lack of trusted information; and an undervaluing of energy efficiency.
Our energy efficiency strategy sets out the action that we are taking to address those real points. First, we are connecting energy efficiency knowledge and innovation with finance. Secondly, we are supporting energy efficiency innovation. Thirdly, we are harnessing the power of improved energy use information. Fourthly, we are encouraging collective action to act on this new and better information. We will be discussing all those when we launch our national energy efficiency mission on 4 February.
The specific case of electricity demand reduction is a vital element of our overall drive to improve efficiency. That is why my Department has been pushing forward that agenda as an integral part of electricity market reform. In the White Paper underpinning that programme, published in July 2011, we committed to undertaking an assessment of the potential for electricity demand reduction and the opportunities for Government to take meaningful action. We all know that there is significant potential for reductions in electricity use.
The hon. Member for Brent North rightly referred to the McKinsey curve. In DECC, we commissioned McKinsey to update and expand on that curve. The research is publicly available and it shows that within the British economy very specifically there are genuine opportunities below the abatement curve to make real cost-effective savings. However, to develop a robust approach to achieving that potential requires specific analysis, and that was the purpose of our initial commitment.

Barry Gardiner: Will the Minister confirm that precisely one of those areas is products and product standards? Therefore the need to address that section of the abatement curve is paramount because it is one of those in which the largest savings can be made.

Gregory Barker: The hon. Gentleman, as ever, speaks with a great deal of experience and knowledge in these matters. He is right. Products are a huge element. The DECC modelling shows that increased product standards form a key part of our energy efficiency strategy, but as my hon. Friend the Member for South Thanet said earlier, this is primarily driven from the European Union because of pan-European product standards.
We can do more. There are a number of specific sub-sectors and technologies within the cost curve which can be attacked through a range of different measures. One of the measures could be an element for demand reduction through the capacity market.

Albert Owen: The Minister will recall that in the earlier debate my hon. Friend the Member for Brent North also said that we could influence these regulations at a European level. What are the Government doing to ensure that we do that, because Europe is not all bad?

Gregory Barker: The hon. Gentleman is absolutely right. Europe is not all bad and we play a very progressive role in areas where Europe should have a competency. There are plenty of areas where we think it is less than helpful to have Europe doing things that could be perfectly well done at a national level. But we certainly are extremely engaged in this whole area. The environment is an area where we feel that we have a strong part to play and we are one of the leading and respected European voices on this.

Luciana Berger: Forgive me for bringing this up, but it will be useful to do so at this juncture. We heard from the Prime Minister at Prime Minister’s Question Time last week that one of the things he would like to amend is European legislation on the environment. Perhaps the Minister could share with us what the Prime Minister meant.

Gregory Barker: The hon. Lady invites me down an avenue where I would no doubt be ruled out of order. We will save that for another day.

Edward Leigh: I am sure that if the Minister is skilful he can keep in order.

Gregory Barker: Thank you, Mr Leigh, for that very helpful ruling. I do not wish to bore you as I know this is not a matter that you take a great deal of interest in—

Edward Leigh: I am always very interested in the Minister’s speeches.

Gregory Barker: I do not think it would be for me to second guess here in Committee the Prime Minister’s words at Prime Minister’s Question Time.
The analysis identified around 92 TWh of potential electricity demand reduction in 2030 that would not be realised through existing or planned policies. This would be equivalent to around 26% of total electricity consumption and includes significant contributions from the commercial sector, the industrial sector and the residential sector: 26% is a huge chunk if one considers just how diverse the energy mix is. That is greater, for example, than the current contribution to the electricity sector of all of our nuclear fleet. This potential lies in a wide range of areas. In the residential sector savings may be achieved through the use of more efficient appliances and products. Improved insulation and automatic lighting controls have the potential to provide a significant contribution in the commercial sector; and in the industrial sector, steps to improve the way motor and pump systems work, through replacing over-large motors with those of the correct size and applying control systems along with improved boilers, also have the potential to make savings. Reducing demand on this industrial scale will mean not only reduced bills for those taking action, but could also deliver substantial savings in terms of the overall cost of our energy system as well as drive up the economic competitiveness of UK plc.

Alan Whitehead: I notice that the Minister’s speaking notes appear to be coming to an end. [ Interruption. ] The Minister is adept at disguising them. Before he runs out of speaking notes, will he confirm unequivocally that he has walked the walk down the corridor to see his scribes at work putting pen to paper on amendments that will come to this Committee concerned with demand-side reduction and putting into practice what he has been talking about this morning? Or will he stand at the doorway of merely considering whether one should have such demand-side reductions as suggested by the consultation paper?

Gregory Barker: I can honestly assure the hon. Gentleman that I am in no way lingering on the threshold or leaning on the lintel. I will come to that point specifically in my speech. If a 10% electricity demand reduction could be achieved, this could result in electricity system cost savings in the region of £4 billion in 2030; and the energy cost savings would more than compensate for the costs of making efficiency investment in those businesses, industries or even in those homes. An electricity saving of this magnitude could reduce UK electricity sector carbon emissions by 4.5 megatonnes of CO2 in 2030 and, roughly speaking, save electricity equivalent to that generated by five large power stations. However, achieving such reductions is not necessarily straightforward. If they deliver economic benefits, why are these actions not already being taken?
The consultation document we published last November sets out our analysis of the barriers that prevent take-up of demand reduction measures and suggests a variety of financial and non-financial measures for tackling these barriers and making concrete progress in reducing demand. We have been talking to a wide variety of stakeholders about these options during the past months and have already received a number of very helpful contributions, such as the Green Alliance report “Creating a Market for Electricity Savings”. As Opposition Members have been kind enough to say, I have taken a strong personal interest in the work in this area for a great deal of time. As we have developed policy within the Department I have chaired several working groups with key interested parties to drive forward policy creation in this area.
On Friday, for the first time, I chaired a meeting at 10 Downing street, pulling together some of the best brains in the electricity markets, from think tanks, NGOs, investors and manufacturers of systems controls, such as Siemens, Dow or Honeywell. We had a very productive session, but I would be kidding this Committee if I pretended that there was unanimity in terms of the conclusions on the clear way forward. The fact is—and probably the reason why no Government have captured this simple proposition before and put it into legislation—the detail is very difficult. There are a number of perverse or potential unintended consequences of framing this challenge in legislation and we are absolutely determined to get this right.
We are open to all options, including financial support measures, and will take final decisions in the context of responses received to our consultation, as well as our own further internal analysis. It would be wrong of me, and inadvisable for reasons that the Committee will understand, to pre-empt a formal consultation that we have begun. This obviously limits to some degree the response that I can give today.

Barry Gardiner: I remind the Minister that he has a history of pre-empting consultations, if he remembers solar and feed-in tariffs. On this occasion it might be positive if he did.

Gregory Barker: Now the hon. Gentleman accuses me of being premature, so I am not going to go any further down that road.

Edward Leigh: I think we have had enough of this.

Gregory Barker: I can assure the Committee that work is progressing on a timetable that will allow us to consider amendments to the Energy Bill during its passage, should it be required to deliver the most effective policy option.

Luciana Berger: Will the Minister explain the latter half of that sentence. Forgive me, I did not quite catch the exact terminology he used, but he indicated that it was not definite that amendments would be forthcoming. I think the spirit of the amendments being put forward today is in anticipation of the Government bringing forward either a new clause or other amendments.

Gregory Barker: Because the consultation has not closed and because a number of options are outlined in that consultation, which is a formal Government document, I have to be extremely careful in the way I choose my words. This is not something that comes particularly naturally to me, but on this occasion I have to be quite careful. I think that hon. Members, knowing my commitment to this agenda, knowing the work that is going on in the Department, knowing that this now is an agenda that is owned by the Prime Minister down, which is why we had that important meeting in 10 Downing street on Friday, knowing that the Secretary of State has been very clear that this is one of his personal areas of interest that he is determined to drive forward, will agree there is real intent to see a proper outcome to this work.
The Bill already enables the definition of capacity to include a wide range of technologies and approaches to providing reliable capacity. Clause 17(3) states that providing capacity can mean reducing demand for electricity and enables provision about the meaning of reducing demand for electricity to be set out in regulations. Amendments 73 and 74 are therefore not required to allow electricity demand reduction projects to participate in the capacity market. Other amendments could, however, be needed to ensure that the capacity market effectively promotes demand reduction projects. We will explore what may be needed legislatively should the inclusion of demand reduction in the capacity market be our favoured option.
New clause 3 proposes a broad enabling power to allow the Secretary of State to implement a financial incentive scheme for electricity demand reduction through secondary legislation. I very much support the intention behind the new clause. Our consultation document sets out a number of different approaches that could be taken to provide financial support to electricity demand reduction projects.
It would be inappropriate to take decisions on the specifics of any mechanism before we have been able to analyse responses to our consultation which closes tantalisingly shortly on 31 January. I hope hon. Members on both sides who, I know, are concerned that we use this Bill as an opportunity to ensure that we finally take the big step forward for demand reduction, will be reassured about the coalition Government’s commitment to take positive action to make a step change in electricity demand reduction. I hope they will be content that we are already considering what powers we will need to make those reductions and that we will return in this carry-over Bill to this issue at the appropriate time. On that basis, I ask that the amendment be withdrawn.

Alan Whitehead: I am sort of reassured by the intention of the Minister. Indeed I know that he, like all hon. Members here this morning, is very concerned about, and committed to, this agenda, and that that informs what he considers to be the best thing to do in relation to the consultation. However, what he did not explicitly say was what exactly would come forward. Indeed, he significantly mentioned that this was a carry-over Bill, so it is conceivable that the intention itself could be carried over.

Gregory Barker: The hon. Gentleman is right. I did not explicitly state what should come forward, but I hope that I made it clear that that was not to do with a lack of determination on my part or the part of the coalition. The fact of the matter is that we are still in a consultation period, which does not close until 31 January. It is unfortunate that this clause was not debated a little later in the Committee’s proceedings, at which point we might have been able to be rather more explicit.

Alan Whitehead: I should have thought that, under the circumstances, the best thing to do would be to hold over a possible vote on the clause until the end of the Committee proceedings. As it is a new clause, Mr Leigh, I believe that that is in order.

Edward Leigh: We can do that on the new clause, but if the hon. Gentleman wants to press this amendment to a vote now, this is his opportunity.

Alan Whitehead: I beg to seek leave to withdraw the amendment, but I should like to leave the new clause to the end of our proceedings. Indeed, let us earnestly hope that the consideration that is going on will have borne fruit by the time we get to that point.

Edward Leigh: That will happen in any event, because the vote on the new clause will be taken later.

Amendment, by leave, withdrawn.

Tom Greatrex: I beg to move amendment 58, in clause 18, page10,line41,at end insert—
‘( ) Provision falling with subsection (4)(j) includes the termination or variation of a capacity agreement in circumstances where the operation of a generating plant is being used to undermine the efficient operation of the capacity market.’.

Edward Leigh: With this it will be convenient to discuss the following:
Amendment 59, in clause18,page11,line9,at end insert—
‘( ) Provision made by virtue of subsection (4)(c) must include provision ensuring that plant which has already entered into a contract by virtue of section 6 will not be eligible to act as a capacity provider.’.
Amendment 63, in clause22,page12,line36,leave out—
‘relating to restrictions on the use of generating plant.’.
Amendment 65, in clause24,page13,line29,at end insert—
‘(e) about the identity of the public body or any other person;
(f) the powers of the public body or any other person;
(g) the terms of reference of the public body or any other person; and
(h) about how the public body or any other person is funded.’.

Tom Greatrex: Amendments 58 and 63 are complementary. They are designed to assist the Government in tightening the provision in the Bill, which, as drafted, provides the Secretary of State with significant powers and has provoked a number of questions that I am sure the Minister is aware of. Amendment 63 removes clause 22(3)(b), which gives the Secretary of State the power to restrict the use of generating plant. That clause gives the Secretary of State the power to impose requirements on parties to a capacity agreement
“relating to restrictions on the use of generating plant.”
The explanatory notes advise the following:
“In relation to restrictions on the use of generation plant and participation in a capacity auction, the Secretary of State could, for example, prevent any part of a generating plant to which a capacity agreement does not apply to be used in a way that undermined the efficient operation of the capacity market.”
I understand the purpose of the provision. There is the potential, as the explanatory notes outline, for generators to attempt—for lack of a more eloquent phrase—to game the system. I have no doubt the Minister will produce a more eloquent phrase with an appropriate quotation alongside it. There is the possibility that one part of a generating plant may be shut off or slowed down to attract greater payments for the part of the plant subject to a capacity agreement. That would be unfair and ultimately, as we have discussed, it would be the consumer who pays. Generators would receive greater subsidy for producing less electricity. I understand and support the Government’s intention, but my concern is that the measure designed to prevent this from happening goes wider than it needs to, and it could perhaps be tightened.
Amendment 63 seeks to remove the power of the Secretary of State to restrict the use of a generating plant. This provision would be replaced by amendment 58, which would allow the Secretary of State to terminate or vary a capacity agreement where the
“operation of a generating plant is being used to undermine the efficient operation of the capacity market.”
The wording of clause 22, to which amendment 63 applies, is very broad and potentially wide-ranging, in that it would allow the Secretary of State effectively to close down a generating plant for any number of reasons unrelated to the capacity market. Given the Government’s intention as set out in the explanatory notes, I contend that the amendment would maintain greater consistency and ensure that those in the industry do not misunderstand that intention.
Perhaps the Minister could confirm whether he agrees that the provision as drafted would allow the Secretary of State that breadth of power. I am sure he will refer, rightly, to the Government’s intention and the explanatory notes, but as we have discussed before, there is a difference between what is in the Bill and what the explanatory notes suggest the provision’s purpose is, and it is important for clarity that the two be as consistent as possible. I ask the Minister to reflect on amendments 58 and 63, which would help to clarify the Government’s intention without causing fear and suspicion among those who have been examining the Bill in recent weeks.
The purpose of amendment 59 is to ensure that generating plant does not receive double subsidy—in essence, the consumer should not be paying twice for the same electricity being generated. The Government have stated that they will prevent plant that is receiving support through CFDs from being eligible for support through either the small scale feed-in tariff or the renewables obligation during the period when both are in existence. That is an entirely sensible and appropriate position, but there seems to be less clarity in relation to the capacity market.
In future, plant receiving capacity payments could be eligible to enter into a CFD, or vice versa. This issue could well arise in respect of CCS plant. Plant that will hopefully be fitted with CCS technology in future could be eligible under CFD, and subsequently eligible for capacity market payments. Amendment 59 allows the Minister to clarify the Government’s stated policy intention, and to say whether he will support the amendment or commit to tabling his own at a later stage.
Amendment 65 is a probing amendment to tease out detail about the enforcement body to be set up under clause 24 to ensure obligations or requirements imposed by capacity agreements are met. Can the Minister give a little more detail on the enforcement body and how it will be funded? Will it be supported by his Department, or will the funding come from capacity payments and therefore from consumers? Has he assessed the likely cost of this body? There appears to be no detail in the Bill’s accompanying documents about the identity of this body. Clause 24 (2) notes that it will be a
“Public body or any other person”,
which leaves scope for just about any organisation or individual to act as the enforcement body. Can the Minister shed further light on this? I do not dispute the need for an enforcement body; it seems a sensible approach and will hopefully give investors and potential investors the confidence that the obligations and requirements under the capacity market will be met. However, it would be useful to have further detail on how it will operate and be established in practice.

Michael Weir: I just want to make a couple of points, particularly with reference to amendment 59. Most of the discussion about capacity has revolved around bringing on line gas plant, for example, and insufficient electricity being generated by other means. However, other technologies may play a part. As has been pointed out to me, pump storage of electricity may play a part within the system of CFDs and capacity mechanisms. As Members are no doubt aware, that technology is used—particularly in Scandinavia—to address some of the problems associated with the intermittency of wind generation. As I understand the process, any excess electricity that is generated but not immediately used to pump water is later released to produce hydro power when insufficient energy is otherwise available. There is a proposal to use that technology in connection with wind farms in Scotland, but it is not clear to me how it fits into the Government’s plans for EMR. The technical update from DECC refers to storage, but it gives no greater detail.
The hon. Member for Rutherglen and Hamilton West’s amendment causes me some concern, because it is not clear how electricity generated by such means will be viewed. In the examples he quoted, where a plant for pump storage is related to a wind farm, there can be an argument as to whether the electricity subsequently produced is the same as that generated by the wind farm. If it had received CFDs, would it then be eligible for capacity payments?
Alternatively, one could argue that, when the energy is released, new hydro energy is being created that may be available for capacity payments. But if the plants are related, amendment 59 could prevent pump storage from being considered for capacity payments and, as such, could stand in the way of the development of this technology, which may not play a huge part in EMR but could be important in respect of wind farms. I ask the Minister to consider the pump storage issue, and the hon. Gentleman to consider whether his amendment may have this—I am sure unintended—consequence.

John Hayes: How wonderful it is to welcome you to the Chair and to serve under you once again, Mr Leigh. I am grateful to the shadow Ministers for their amendments, which raise important issues related to terminating or varying capacity arrangements and the interaction between the contracts for difference and capacity market, placing restrictions on the capacity market’s enforcement and dispute resolution process.
Amendment 58 relates to terminating or varying capacity agreements. In essence, as the Committee knows, the purpose of this part of the Bill is to deliver an efficient capacity market that will bring forward reliable capacity. That is very important because there are concerns about whether there will be sufficient capacity to meet demand.
Committee members will be familiar with Ofgem’s report to Government suggesting that spare capacity will tighten significantly over the next decade. There is some suggestion that that may be an overestimate of the problem, given the role of interconnectors, on which DECC analysis puts greater emphasis. None the less, the trend identified by Ofgem—that spare capacity could shrink from 14% to 4% in the winter of 2015-16—broadly reflects our own analysis, and the Committee will be familiar with the Ofgem document and my Department’s response. This part of the Bill and the amendments are pertinent to all that analysis.
It is also worth saying that that problem may be exacerbated by coal going off stream more quickly than anticipated and new gas-generating capacity coming on stream more slowly than anticipated. These are vital matters that deserve the Committee’s attention and consideration, thus the significance of the amendments.
I think that hon. Members on both sides of the Committee will agree that it is right that any plant that is operated in such a way as to undermine the intentions of the capacity market should face having its capacity agreement terminated. Clause 18(4) establishes that the conditions where capacity agreements may be “terminated or varied” will be set out in regulations, which will address that important issue. It is important to point out that any regulations made under this aspect of the Bill have to be for the purpose set out in clause 17(1), namely
“providing capacity to meet the demands of consumers for the supply of electricity”.
That effectively acts as a limit on the breadth of the power under clause 22(3)(b) on requirements
“relating to restrictions on the use of generating plant”.
Turning to the interaction between CFDs and the capacity market, and amendment 59, the Bill’s intention is to enable a range of technologies specific to the capacity market to contribute towards providing us with reliable capacity. However, as the shadow Minister said, not all technologies are suitable for inclusion at the outset. Although we recognise his point, this is not something that will be set in stone. He mentioned CCS, which I will come to in a moment. The essence of the restriction is to prevent technologies from bidding in the capacity market and receiving other financial support, which the shadow Minister recognised and pointed out. We therefore made it clear that a CFD plant—a plant that is receiving extra financial support in respect of CFDs—is not part of the capacity market. They are excluded while the CFD is being administratively set. As has been pointed out, that is to avoid overpayment and, by so doing, to protect the interests of consumers.
So the essence of the first phase of the CFDs is to avoid overpayment while the price is set. Thus the capacity market will be limited. As the process evolves, particularly as we move to auctions, it may be appropriate to allow plant that is in receipt of CFDs to participate if that will result in better outcomes for capacity and consumers. The hon. Gentleman has a long-standing interest in CCS and I have no doubt that it will inform our consideration over time. Neither I nor the Government —although, in this context, I am the Government—have a fixed view about that, but we will consider the role of CCS in the capacity market, and I might say more about that later. The hon. Gentleman is absolutely right, however, that the flexibility that is implicit in the position that we have adopted would allow us to take an open-minded view about the role of technologies such as CCS in the capacity market over time. The interaction between the provision of CFDs and the operation of the capacity market is something that we need to keep under review. As I said, we need to retain the option for CFD plant to participate.
Amendment 63 concerns the power to place restrictions on the use of generating plant. The purpose of the provision is to ensure that opportunities for exercising market power and gaming can be minimised, which the hon. Gentleman mentioned. C. S. Lewis said:
“We are all fallen and…all very hard to live with”.
Of course, because we are fallen, there is the potential for people to game the system in their interest, rather than the national interest, which is of course what drives all of us. We are unusually virtuous in that regard, although fallen—I do want to emphasise that. There will be people who might try to manipulate the system to their advantage, and the obvious way of doing that, which we have mentioned before, is by withholding capacity from the system and then bidding to be part of the market. We want to minimise that possibility, because the behaviour I have described would not only limit the effectiveness of the capacity market, but drive up prices for consumers, so the knock-on effect would be unhelpful in at least two ways.
In the course of the work on designing the capacity market, it has been clear that it is imperative to have visibility of the range and type of capacity available through the system, irrespective of whether that capacity intends to participate in the mechanism. For example, we need to ensure that we can address gaming opportunities whereby plant may notify its intent to close to drive up prices in exactly the way that I have said. We are requesting powers to make regulations to cater for that situation.
I have made this point to the Committee before, but it is important to put on record again that the detailed design of the capacity market will be published in May. That will add to the detail we have already published, including that published alongside the Bill, of which the hon. Gentleman will be aware. We are proposing to consult on implementing the regulations and code changes in the autumn. I am confident that there will be opportunities to look at this issue in considerably more detail during the passage of the Bill, and it is right that there should be.
We are determined to get the design right. We are basing it not only on our analysis and the work that we are doing with Ofgem, but on best practice in places where capacity markets have been implemented. The hon. Gentleman and the Committee will know that the capacity market mechanism has been employed in north and south America, so we want to look at how those markets have operated in respect of both gaming and protecting against that eventuality. France is considering putting a capacity market in place, so we will watch that process with interest, too, because it is important that the capacity market not only is constructed in a way that maximises its value, but evolves over time to reflect our analysis of its effects.
That brings me to the enforcement and dispute resolution process, which again the hon. Gentleman raised when speaking to his amendments. The effective operation of the capacity market is dependent on participants having clearly defined obligations, backed up by a competent enforcement regime and a transparent appeals process. In principle, we intend to utilise existing enforcement powers and dispute resolution processes where appropriate. Details on the enforcement of the penalty regime and dispute resolution are set out in subsections (1) and (2) of clause 24. We envisage that existing arrangements will be appropriate to cover the funding of any person who is given enforcement or dispute resolution functions under clause 24, which could include Ofgem, courts, tribunals or arbitration services. It is therefore proposed that no additional provisions will be required in regulations.
I want to emphasise that there are good existing mechanisms for dealing with such potential challenges, so we do not want to introduce unnecessary further legislation, or indeed regulation. Ofgem has an existing enforcement role in the energy market. As I said, we are working through the detail of the design of the capacity market, with further information to be published in May, including on the role that Ofgem will play. We are working with Ofgem, and I want to be clear then about how it can use its existing powers in the particular regard that the hon. Gentleman mentioned, which is implicit in the amendments.
I therefore ask the hon. Gentleman to withdraw the amendment, on the basis that, I hope, the explanation has been agreeable to him and appropriate to his questions.

Michael Weir: The Minister has not addressed the issue I raised about pump storage. Can he give us any information on that?

John Hayes: I did not really understand what the hon. Gentleman was talking about, so I did not respond to him, but that was not meant as a discourtesy. He made an important point about wind that I did not really grasp, so I am inclined, with his indulgence and yours, Mr Leigh, to consider the matter further and write to him. The point was important, albeit tangential to the principal arguments around the amendments, and it is worthy of a proper response, so I do not want to give him a casual or inadequate one now.

Tom Greatrex: Amendment 59 was tabled as a probing amendment. Its aim was to tease out how the capacity market and CFDs might interact. I mentioned CCS and the hon. Member for Angus mentioned pump storage, but the point is similar. One form of generation and supply might end up being applicable to both, and we need to be conscious of where costs will arise. I have no intention of pressing the amendment to a Division.
With regard to the other amendments, it might be helpful for all members of the Committee if, as the work continues, the Minister shares with us the aspects of different American and south American capacity markets in which he is interested, because that would inform us of how the Government’s views are developing and the direction they are taking. We will no doubt come on to talk about the capacity market in more detail when we consider subsequent clauses.

John Hayes: That proposal delights me in two respects. Not only will it give me a chance to continue my habit of writing to the Committee during its progress, which I think is the right thing to do, but it will test my officials, which is important too, for the hon. Gentleman has allowed me to ask them to explore south America in rather more detail.

Tom Greatrex: I am glad to have been of service to the Minister by helping him to keep his officials on their toes. I welcome the frequent e-mails that have emerged from his office over the past few weeks. When the Committee finishes, I do not know how I will live without them.
On a serious point, as the Government work towards the detailed operation of the capacity market, it is important that they bear the points made in this group of amendments in mind. I hope that the Minister will keep members of the Committee informed, because it is vital that the capacity market works in a way that addresses our concerns. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 18 ordered to stand part of the Bill.

Clause 19  - Capacity auctions

Question proposed, That the clause stand part of the Bill.

Tom Greatrex: I do not intend to detain the Committee for long on the clause, but there are a couple of relevant points that arise from our previous consideration. The Minister has referred to the Ofgem capacity assessment report from late last year and the rather alarming 4% capacity figure, which helped to focus attention on the importance of these issues, even if the coverage might not have been completely accurate. The Minister has set out why the figure might well be 4%, and one reason is that gas capacity is coming on stream more slowly than he might have anticipated. Part of the explanation behind that is tied to the lack of detail about the capacity market, because people are holding off making decisions. In fact, I think that DECC information shows that construction has not started on 13 CCGT plants that have received planning permission. Those plants would represent a significant amount of capacity, so whatever discussions we might have in our consideration about the appropriate amount of gas capacity, there is certainly evidence that people are holding off from taking things forward, partly because they want more detail in the Bill about the capacity market.
I appreciate that the Minister set out the timetable in which the relevant detail will emerge, but he will be aware of concerns expressed by the CBI and SSE in oral and written evidence about the lack of detail, particularly regarding whether a capacity market will be introduced. We are talking as though it will happen, but the decision has yet to be taken. I understand that it will be taken later this year, with an auction potentially next year.
The format of the auction, how it will be decided, how much will be allocated, the eligibility rules for generators and how the payments will be funded are significant issues. I anticipate that the Minister will tell us that the detail will come later this year, but I wanted to flag up the fact that there are significant gaps in the detail that will need to be filled if the capacity market is ever to emerge and to get up and running.

John Hayes: I do not want to delay the Committee unduly on this, as the hon. Gentleman suggested I should not. He is right to say that clarity on the detail will trigger certainty about investment. The plan, as he will know, is to run the first capacity market auction in 2014 to deliver in 2018-19; that is how the Government are minded, currently.
The hon. Gentleman is right to say that it is important that we do not, therefore, delay further investment in new capacity, and he is also right about sticking to the timetable I described for publication of more detail. Although the work is challenging, and he has invited me to consider South America in more detail, it is none the less important for us to signal our intent and reinforce it with more information. That will certainly happen along the lines that I described.
The hon. Gentleman will be interested to know that north America, particularly New England, also has considerable experience of capacity markets and how they evolve. There is a history in north America in particular of capacity markets evolving and responding to changed circumstances. Of course we are looking at that, too; but he is right that investment depends to some degree on that clarity. Grandfathering arrangements will help with that as well.
I think our intentions with respect to the clause are clear from the Bill and the explanatory notes, so rather than exhaustively describing the basis of our intentions I shall perhaps just say something about auctions.
The auction will determine the level of payment that capacity providers will receive. That is well established. Doing that through an auction will enable the lowest long-term sustainable price for providing the amount of capacity required to be achieved. That is broadly the approach used in the United States, which is why I mentioned its experience. We need to be clear—we began this work, of course, some time ago—about what has happened in the United States and what the response was.
The clause enables regulations to make provision for decisions on the timing of capacity auctions; on the amount of capacity to be contracted for—which of course depends on some of the analysis I described earlier—on the process by which the auction is to be run; and on appeals relating to capacity, for example from bidders who are unsuccessful in the auction. A final decision on the timing that we are minded to pursue will depend on a refreshed analysis of capacity. That will be informed by updated advice from the authority and the national system operator, which will consider economic growth, recent investment decisions, the role of interconnection and energy efficiency, some of which my right hon. Friend the Member for Bexhill and Battle spoke about in terms of demand reduction.
We expect the decision on how much capacity to contract through the auction to be taken by Ministers, four years ahead of the delivery year when capacity will be expected to be in place. We expect that decision to be taken with reference to a reliability standard, in order to ensure that we strike the right balance between system reliability and cost to consumers. That is something we discuss regularly; indeed, I attended a meeting with my officials on exactly that subject yesterday. More information will be provided and it is likely to offer considerable comfort to generators that are making investment decisions. We will take the decision about timing on the best possible analysis of trends that are likely to affect supply and demand. The clause sets out the means by which we do all that.

Question put and agreed to.

Clause 19 accordingly ordered to stand part of the Bill.

Clause 20  - Settlement body

Tom Greatrex: I beg to move amendment 62, in clause20,page12,line20,at end insert—
‘( ) Provision made by virtue of this section must provide for—
(a) the identity of a settlement body;
(b) the powers of a settlement body;
(c) the terms of reference of a settlement body; and
(d) the funding arrangements of a settlement body.
( ) The settlement body must report annually to Parliament.’.
I do not want to detain the Committee long on this probing amendment, through which I seek to obtain further clarity about the settlement body, or information on when such clarity will be provided. I presume that the settlement body is intended to perform a function similar to that of the CFD counterparty. Effectively, it will be a middleman—or middle person—between capacity providers that generate electricity and suppliers that pay for it. Of course, consumers ultimately pay.
Can the Minister shed any light on exactly who the settlement body will be? Will it be a public body like the CFD counterparty, at arm’s length from Government? Will it be underpinned by Government, or is it intended to be an entirely private organisation, given the functioning of the capacity market that he has just touched on? If so, what guarantees are there that payments will be made to and from capacity providers and suppliers? As with the enforcement body in clause 24, it is not clear whether the settlement body will be funded through general taxation or as part of the wider capacity payment mechanism. I hope he can provide, if not clarity on that point, at least some indication of the Government’s direction of travel.

John Hayes: I, too, will be reasonably brief. The settlement body is obviously an important part of the process. It is how we pay capacity providers effectively for their capacity and charge suppliers enough to fund those payments. By doing so properly, the settlement body is vital to ensuring that participants are confident that the revenue flows in the capacity market are funded and secure.
The Government intend to consult widely on the regulations and codes that we seek to implement in relation to the capacity market. Those regulations will include provisions that deal with the role, responsibilities and functions of the settlement body, and they will set out the appropriate reporting arrangements for the settlement body. Although it is a matter for further consultation, the reporting arrangements are likely to follow existing industry precedents and provide a report to all capacity market participants and the authority. Given that that aligns with existing electricity market practices and given that the capacity market will be subject to periodic reviews, following which the Secretary of State must lay a report before Parliament, we do not propose that the settlement body itself should report to Parliament.
I will say one more thing in relation the hon. Gentleman’s question. We have not yet determined which body or organisation will be the settlement body under the new enduring customer arrangements. A range of options exists and we are still considering the appropriate way forward. One option would be to realise potential efficiencies by using existing systems and data already present in the wholesale electricity market. Elexon delivers a role similar to the envisaged settlement body within that market. However, there are other options and there may be other agencies with the capability to carry out the settlement body’s functions. The hon. Gentleman will appreciate that we could feasibly consider carrying out a procurement process for the role.
The important thing is that we make our further thoughts available as soon as possible. Given that we are going to report in May on the capacity market design, and in response to the hon. Gentleman’s questions, I will make a commitment to the Committee that in May we will also report on our thinking in this area as part of that report on the design. As the hon. Gentleman rightly said, we need to know more about this, so we will report on our emerging thinking on the settlement body.

Ian Lavery: The details on the settlement body seem sketchy, to say the least.

John Hayes: Sketchy?

Ian Lavery: Yes. Will the Minister clarify what powers the settlement body is likely to have?

John Hayes: Essentially, the settlement body’s powers, as I said at the outset, are there to ensure that those involved in the process are confident about engagement and the funding of their engagement. We are consulting further on this. I am delighted that the hon. Gentleman has intervened; we have heard too little from him, and I always like to hear from him during these considerations.
The point the shadow Minister made was about the capabilities of the body to fulfil that function. He asked if it would be an entirely private body and what would it look and feel like—not so much a question of its function as its ability to ensure that that function is delivered effectively. It is important that we are clear about the function in relation to the design of the capacity market; but I am also conceding that it is important that we give more detail, become less sketchy and draw our thinking into sharp focus, in the way the hon. Member for Wansbeck suggests, regarding who that body might be. I am more than happy to provide the greater clarity that the hon. Gentleman and the shadow Minister understandably want to see, at the same time as the design details are made available, in May.

Amendment, by leave, withdrawn.

Clause 20 ordered to stand part of the Bill.

Clause 21 ordered to stand part of the Bill.

Clause 22  - Other requirements

Question proposed, That the clause stand part of the Bill.

Tom Greatrex: I will be brief on this clause, on which I hope the Minister can shed a little light. We touched on some of the issues relating to it when discussing some of the amendments tabled to clause 18.
Clause 22(1) states:
“Electricity capacity regulations may impose requirements otherwise than under a capacity agreement.”
One reading of that is that gives the Government the power to make capacity market regulations about anything other than the capacity market. Another way of saying that is that capacity regulations can impose requirements about anything. That interpretation is strengthened by subsection (2)(c), which states that the requirements may be imposed on
“any other person who is, or has ceased to be, a capacity provider.”
Regulations can therefore impose requirements about anything on capacity providers or those who were once, but who are no longer, capacity providers.
The Minister will accept that, on that reading, the powers sound particularly broad and that that has raised questions. Will he therefore provide a little more clarity on the intent behind subsections (1) and (2)(c)? As they stand, they seem very broad, and many people will note what he says about them. We may wish to amend the clause at a later stage to clarify the issue in the interests of the working of the EMR. I would be grateful if the Minister responded to that question.

John Hayes: That is an excellent point, and I am delighted to be able to respond. The intention is not for these powers to be permissive. The hon. Gentleman will appreciate that the regulations have to be for the purpose of providing capacity to meet the demands of consumers, and that is made clear in clause 17(1). These powers are therefore limited by that overarching responsibility in respect of regulations.
However, clause 22(3) will enable regulations to include provisions to allow for action to be taken in exceptional circumstances—this is the point I think the hon. Gentleman seeks to draw from me—should capacity providers attempt to drive up the price of capacity by bidding in non-existent plant or deliberately withholding capacity from the auction. Such considerations mirror the approach taken in international examples of capacity markets of the kind I mentioned earlier to mitigate gaming potential. The power is therefore sufficiently broad to deal with such circumstances, but sufficiently limited to reflect the specific overarching requirement in clause 17.
The hon. Gentleman makes a good point, but I am entirely comfortable in assuring the Committee that clause 22, in those terms, fulfils its function, but without giving powers that could reasonably be regarded as excessive. Its provisions are there to ensure that functions are exercised appropriately. As such, they are necessary to direct the function of the capacity market to its intent.

Question put and agreed to.

Clause 22 accordingly ordered to stand part of the Bill.

Clauses 23 to 28 ordered to stand part of the Bill.

Clause 29  - Modifications of transmission and other licences: business separation

John Hayes: I beg to move amendment 8, that clauses 29 to 32 of the Bill be transferred to end of line 4 on page 20.

Edward Leigh: With this it will be convenient to consider Government amendments 1, 2, 9 and 3 to 7. We are making excellent progress.

John Hayes: For which, second only to you, Mr Leigh, I take the bulk of the credit. The shadow Minister invited me to draw on a rich lexicon in the way we inspire our affairs. It was Sir Henry Royce, the founder of Rolls-Royce, who said:
“Strive for perfection in everything you do. Take the best that exists and make it better”.
This is what we are doing with these Government amendments. When the Government amend legislation, that is precisely the instinct that drives all they do.
The amendments are minor changes to correct an inconsistency in the Bill and ensure that it works to best effect. Their intention is to ensure that provisions in the Bill relating to the system operator’s role as an EMR delivery body—the result of the provisions on conflict of interest—are defined as intended and cover any role the system operator has in relation to investment contracts. The Bill as introduced applies these provisions only to CFD and capacity market chapters. The amendments also give effect to consequential changes to the ordering of the chapters and schedules within the Bill, which will be reflected in the Bill when it is reprinted for Report.
With that remarkably brief, though I hope appropriately erudite, explanation, I beg to move these amendments.

Amendment 8 agreed to.

Tom Greatrex: I beg to move amendment 76, in clause29,page15,line36,leave out from ‘if’ to end of line 37 and insert
‘the body acting by virtue of section 4(2) is a holder of a licence to distribute electricity by virtue of section 6(1)(a) to (e) of the Electricity Act 1989.’.

Edward Leigh: With this it will be convenient to discuss amendment 77, in clause30,page17,line20,at end insert—
‘(e) the Secretary of State must report annually to Parliament on the performance of the national system operator.’.

Tom Greatrex: We have made significant progress in the last few minutes and I may slow that down a little, but I hope not too much. Last week, in relation to a probing amendment from my hon. Friend the Member for Southampton, Test, we discussed the National Grid as the system operator.
There was some good discussion around whether we would have started from here and the potential concerns. The Minister will be aware that, while National Grid says that it will undertake the role as required, it is no secret that there was anxiety within National Grid about how exactly it is envisaged this would work. I am sure the detail will bring more comfort.
The Minister referred to the importance of ensuring that National Grid—which is, after all, a listed company––in regard to a lot of its activities overseas as well as in the UK, should not come into conflict over the interaction of that part of its activities and its acting as the system operator. That is a very important part of this Bill if National Grid is to be the system operator.
Amendment 76 is, what I call, the Chinese wall amendment. It is designed to ensure that there is an unbreakable force between the two arms of the same business and that strict business separation measures are in place in the situation where the body acting as the national system operator also holds a licence to distribute electricity.
Business separation measures are not new. They have been around for a long time and the term was popularised after the 1929 stock market crash. The most famous business separation law is the Glass-Steagall Act 1933, which imposed strict separation measures on commercial and other banking. Those issues have been raised in discussions in the recent past. Separation measures are also important in the legal industry. In some cases, they are so strong that the same legal firm cannot represent both parties in a dispute. Business operation measures are not new and are important in that regard.
The National Grid currently has a role in the transmission network, carbon capture and storage businesses, interconnection and offshore wind transmission. Those are commercial interests where National Grid acts like any other company and seeks to make a profit for its shareholders. However, because of National Grid’s significant commercial interests, it is important to ensure that it operates and acts completely independently as system operator. The Government have said on a number of occasions that it is important that there is a degree of separation between those two businesses, but as we also know from activities in other sectors, there have been times when the good guidance and the intent have not necessarily been followed through. I am not casting any aspersions on National Grid or anyone associated with it, but we have seen that in financial services in recent times. It is important for the Government and for this legislation that those safeguards are properly in place.
It would be helpful to reflect for a moment on the role of the system operator and what it actually entails. Annex D, which is published alongside the Bill, details the institutional framework for the delivery of EMR. It says:
“The System Operator (SO) is responsible for making sure that electricity supply and demand stay in balance and the system remains within safe operating limits. The SO role is defined by the SO conditions of the transmission licence. In addition to these licence requirements, the SO must meet minimum standards and obligations as set out in legislation, such as its obligation under the Electricity Act 1989 to develop and maintain an efficient, coordinated and economical system of electricity transmission and to facilitate competition in the supply and generation of electricity.”
It is an important and influential role, involving both CFDs and the capacity market. Along with the CFD counterparty, it is probably the central role in ensuring that EMR is delivered effectively, so it is important that this does not go wrong. As the Minister is aware, the Select Committee looked at the issue during its pre-legislative scrutiny and recommended that a new independent, not-for-profit body be set up to act as system operator, arguing that it is not appropriate for a private company, which is ultimately motivated by profit-making, to act as the delivery body.
The Select Committee’s position was reached unanimously, so I expect that all members, across all parties, will have shared those concerns outlined during the pre-legislative scrutiny. Although I have some sympathy with the argument, what should happen is that rather than establish a new body, there should be rigorous business separation measures in place to ensure that there is no contamination between the two parts of National Grid’s operation.
I am inclined to agree with the Government’s view that National Grid is the right body to act as system operator provided that those separation measures are in place. Our amendment would remove from the Secretary of State the obligation of imposing business separation measures if he deems it necessary and impose an obligation on him to do so where the system operator also holds a distribution licence. That does not mean that there is a requirement for unnecessary separation measures, but it makes it clear that if the system operator is National Grid, the Secretary of State must act. That is in the interests of the Government, of the generation industry and of the consumer. Those separation measures need to apply to all aspects of National Grid’s operations, from the people involved to the IT and accounting systems, the physical location of the commercial and system operator arms and much more.
In relation to the individuals involved, will the Minister use his response to confirm that there will be no crossover between individuals responsible for National Grid’s commercial arm and the system operator functions, say how far up National Grid’s chain of command that will extend and, in particular, explain how that it will all interact at board room level? The Government launched a consultation at the end of November on potential conflict of interest concerns in relation to National Grid’s EMR delivery role, which closes, I think, this week. Will the Minister update the Committee on that?

Albert Owen: My hon. Friend is making a powerful point. He referred to the Energy and Climate Change Committee; when we looked at this matter, those safeguards were not in place and the consultation was not under way, so we need to go down a gentler route. Is he as concerned as I am that the system operator will be looking not only at the UK perspective? The letter kindly provided by the Minister last week showed that Greenwire’s proposals from Ireland will also be overseen by the grid. There could then be conflicts with not only national issues, but some international supergrid matters.

Tom Greatrex: I thank my hon. Friend. He makes an important and topical point that I am sure that the Minister heard and will want to respond to because it underlines the importance of ensuring that separation measures are in place from the start and that it is not left to discretion or for something to be done later. If measures are set up from the start, people will be clear about how things will operate and they can have confidence and clarity.
I want to press on the Minister the need for measures to be in place, but also for them to be seen to be in place because that is vital for confidence and clarity. There needs to be confidence that the process is fair and transparent and that there is no risk of any commercial organisation, or individuals within a commercial organisation, motivated by various matters, gaining an unfair advantage in other aspects of the business that they are a part of. The measure is vital in ensuring that EMR delivery is absolutely clear with real transparency and clarity, so I seriously and genuinely ask the Minister to look at the amendment in detail and not to seek to dismiss it as something that is not required. There is a real difference between the amendment and the Bill as it stands; the amendment would give the Government much greater clarity and certainty and would leave us in a much better position.

Alan Whitehead: I also do not want to detain the Committee long, but I emphasise in the context of both our debate on the principle of National Grid being the system operator and of our debate on capacity payments how important it is to consider not just whether the Secretary of State might undertake measures to ensure that there is proper separation of function, but to make sure that he does undertake measures to ensure that there is separation of function if National Grid is to be the system operator. That is because in the specific instance that may arise, which we discussed in the previous debate, it is more than possible that capacity payments, for example, may relate to interconnection. Indeed, that was specifically mentioned in that debate.
National Grid has not just a general function relating to interconnection, but it is a partner in a functioning interconnection activity, the BritNed interconnector. At first sight, if one wanted to make a not entirely fair analogy, it is as if one were setting up J Sainsbury plc as the planning and building authority for all supermarkets in an area where Tesco and Asda may also have applications to run supermarkets. In those circumstances, we would clearly raise big questions about whether that was the appropriate way to do things, and if so how to ensure that an active operator of a system is not tempted, or even unconsciously swayed, when other operators come along and want licensing arrangements and perhaps support arrangements for their interconnectors to be considered fairly and straightforwardly.
I share the view of my hon. Friend the Member for Rutherglen and Hamilton West that this is not reflection on National Grid as an organisation. It is a reputable body that undertakes its functions with great skill and fairness. The principle is to ensure that when conflicts might arise, everything possible is done to ensure that someone cannot morally come along later and say that they were not treated fairly under the procedures.
There is also the issue of legal challenges involving conflict of interest arising later if clear assurances are not put in the Bill now. I ask the Minister to consider the amendment seriously. It would strengthen his hand by ensuring that what has come forward, as was acknowledged by my hon. Friend the Member for Ynys Môn in respect of the Select Committee, is as good as it can be. We all want a system regulator that is seen to be fair as well as acting fairly in this important area of energy market regulation.

Albert Owen: This amendment is important, as was the contribution of my hon. Friend the Member for Southampton, Test. The Select Committee was concerned about the matter for some time during its inquiry, but we understand that the Government have moved to introduce safeguards. The amendment would add extra protection. It is in the Government’s interest to have the separation of power clause in the Bill, and in the interest of National Grid as the systems operator. It needs the assurance that there is no perception that the operator makes the decisions about connection of important new generation to the grid.
The Minister did not deal adequately with the comment of the hon. Member for Angus, who talked about some of the more difficult operations offshore and in remote areas when connecting to the grid. Cost could be a determining factor, and if a company such as the systems operator of National Grid has an obligation to shareholders as well as the national interest, there may be a conflict and that may sometimes be blurred. The separation of powers that my hon. Friend advocates in the amendment would help to achieve greater transparency and fairness, and I am sure that all members of the Committee want that.

Barry Gardiner: Will the Minister respond to this particular question: to whom will directors of National Grid have a primary legal obligation? Will it be to their shareholders or the commitment in the Bill to the Government and consumers?

John Hayes: What a useful debate this has been. Ruskin said that quality is never an accident, but always the result of intelligent effort. Such endeavour characterises the work not only of this Committee, but of the Government in ensuring that the relationship that has been discussed.

Barry Gardiner: I just want to clarify whether the Minister or Ruskin are seeking to disprove the theory of evolution in that remark.

John Hayes: That is not a matter I want to discuss at great length, except to say that it is a theory.

Edward Leigh: No, the Minister may not discuss it at great length, although it would be quite fun.

John Hayes: Mr Leigh, I know you think I am fun, but I like to be reminded of the fact from time to time.

Edward Leigh: Vanity is not your problem; it is theirs.

John Hayes: The debate about the role of National Grid as the systems operator has been ongoing since the draft Bill was published. We have been reminded today that the Select Committee—of which there are a number of members present—made a point about this in its scrutiny of that draft Bill. It raised, in recommendation 43 of its first report of session 2012-13 in response to the draft Energy Bill, doubts about the potential conflict of interest of the National Grid providing this function. It highlighted its fear about the cost to consumers, and I am therefore anxious to assure the Committee that the work we are doing on this is open-minded. We do think that the synergies National Grid brings are of profound importance, and that has led us to our conclusion. However, it is right that having come to that conclusion, we consult on the range of issues associated with both the Select Committee’s observations and the observations that have been made here today. I hope to be able to deal with those in my reasonably brief remarks, but I do not want them to be insufficiently expansive to cover this matter in the depth that it deserves.
There are strong synergies between the system operator’s existing role in the economic and official branding of the electricity system and what is proposed under EMR. For example, there are strong links between a capacity market and the existing range of balancing services that the operator provides. It is almost fair to say that if it was not to be National Grid offering this function, it would have be a reinvention of something that looked very like National Grid, given its understanding of capacity and the central role of capacity in broad considerations around EMR. That reinvention would be necessary because of the technical expertise that currently sits with National Grid, as well as its financial and commercial skills, without which it would be hard to deliver the capacity market in an efficient and effective way. To take an example, modelling future supply-demand trends is something the system operator will be obliged to do in order to come to decisions about the delivery of auctions. It would be very difficult to imagine another body providing that function, given that National Grid is uniquely placed to understand the implications of different technology mixes brought on by EMR, and that that is so central to the success of these reforms.

Albert Owen: The Committee did consider this when we were taking our evidence, and we arrived at the conclusion that it would be a not-for-profit, independent company, but that it could still draw on the expertise of National Grid and of many other experts in the field when we have new generators. It is purely the financial issues and shareholder responsibilities that put pressure on the systems operator, is the main concern that the Committee had.

John Hayes: Yes, I appreciate that. I was not suggesting for a moment that the Select Committee was not mindful of the important skills that are necessary for this function to be delivered properly. However, the coincidence of those skills with those of the existing system operator is so profound that National Grid would be best placed to deal with the associated challenges, providing—I emphasise this—that we take account of the concerns that were highlighted by the Select Committee, and that have been highlighted again today, about potential conflicts, and I want to address that in some detail.
Before I do that, however, I want to emphasise the character of the system operator’s role. The system operator will provide technical analysis requiring the skills I mentioned and run some of the mechanistic process I also mentioned, such as auctions, under rules set out by the Government. Separately, I emphasise that decisions about such matters will be taken by the Government, not the system operator. However, the system operator is vital to the advice the Government receive and the processes resulting from their decisions.
The intention in amendment 77 is that the Government report to Parliament on the performance of the system operator to ensure that what it does is right and proper, cost-effective and mindful of the cost to consumers, and transparent and accountable. I am sympathetic to the intentions behind the amendment. As I made clear earlier in our consideration, I am mindful of the continuing concentration by members of the Committee on accountability and transparency, and I am minded further to consider the issue during the Bill’s passage. We might act in advance of that stage to provide further comfort in that regard. This is one of those areas—the way the system operator’s role relates to the success of EMR and how that is reported—where we could perhaps do more. Amendment 77 is a helpful further catalyst for that thinking.
Amendment 76 raises the issue of how to manage conflicts of interest between the system operator’s current role and its role in delivering EMR. The Committee will recall that the issue was raised in our evidence sessions with National Grid, not least by the hon. Member for Ynys Môn, who has been diligent and consistent in his scrutiny of this matter. The witness from National Grid said:
“we have a lot of experience of managing…perceived or actual conflict issues. We have 20 years of experience and a number of partitions in our business already.”––[Official Report, Energy Public Bill Committee, 15 January 2013; c. 36, Q114.]
He offered further detailed advice about how National Grid already deals with some of the tensions that lie at the heart of the arguments that have been made to support the amendments.

Albert Owen: On that evidence session, we were all trying to get as much in as we could, and there were a lot of us. However, when I pressed the witness about the shareholder interest and the national interest, he said that the shareholder interest was a priority to the company.

John Hayes: Yes, I was just reading that as the hon. Gentleman intervened as I thought he might say that. As hon. Members will remember, the gentleman from National Grid—Mr Nick Winser—identified four ways in which it currently manages conflicts of interest. I will not go through them exhaustively because they are already on the record. It is not unreasonable to say that even with the further questioning that the hon. Gentleman offered then, and has reprised today, National Grid was confident that it was capable of handling that potential conflict. That provides some comfort. It could be argued that he would say that anyway, but he did not just say it, he drew on evidence to support that assertion.
Let me deal with some specific matters that have been raised in our consideration this morning. The hon. Member for Ynys Môn raised the issue of interconnection, particularly with Greenwire. The consultation does consider this. We will discuss a range of issues with the Welsh Assembly Government. We will specifically look at the matter he raised in respect of our further work on how this will be managed. The hon. Member for Brent North asked to whom the directors have a primary obligation, a question also raised by the hon. Member for Ynys Môn. The systems operator will be legally obliged under its licence to carry out its role, either as part of the licence or in secondary legislation. In fact there will be an interaction between the two in practice.
There will be a legal requirement which will be enforceable by Ofgem in the same way that National Grid’s existing statutory obligations are enforced and in the same way that existing licence requirements are detailed. There will be a clear legal obligation to carry out those aspects of its work that relate to its role as systems operator above and beyond any other consideration. It should be borne in mind that in terms of interconnection National Grid’s business is already separated from its transmission business. So that is why Mr Winser could be confident about that aspect of the questioning to which he was subjected.

Barry Gardiner: Earlier this morning the Minister referred with his usual sagacity and perspicacity to the human capacity for gaming. Can he envisage any circumstance in which National Grid, when not actually confronted with a conflict of interest at that point, could look to take a course of action which might avoid it being confronted with a conflict of interest in the future, but which would be to its shareholders’ advantage and avoid a situation arising in which it would either have to or fail to meet its public obligations?

John Hayes: That inquiry involved so many silky changes of tense that I think I will have to deal with it in a moment when I have said a little more about the amendments.

Edward Leigh: You have about 30 seconds.

John Hayes: I will attempt to come to terms with both its grammar and its content.
The relationship between the Department and Ofgem in these matters is such that we are currently consulting on potential conflicts of interest and how they should be mitigated and managed. Ofgem is involved in that because of its existing regulatory role.

Edward Leigh: Order. It gives me great delight to interrupt the Minister.

The Chair adjourned the Committee without Question put (Standing Order No. 88).

Adjourned till this day at Two o’clock.